If cash flow is the engine that drives businesses forward, delinquent
accounts are the brakes that bring businesses to a sudden and screeching
halt. Most credit managers are aware of the fact that the probability
of collecting a delinquent account drops dramatically over time. For
example, according to one analysis after six months the probability
of collecting drops to 57%, and after a year, the chance of collecting
a past due account drops to well below 30%. Credit managers need to
make certain that their internal collection efforts are adequate to
Make sure your customers know your terms of sale. Make sure these
terms appear on every document that is sent to customers including
invoices, monthly statements, collection letters, and dunning notices.
Flag accounts with irregular payments for closer scrutiny.
Eliminate so called grace periods. Follow up immediately on past
Establish a method of monitoring the financial performance and
payment patterns of accounts identified as marginal credit risks
based either [a] on their financial condition or [b] on their payment
If DSO is creeping up, review and tighten both your collection
procedures and your credit granting policies and procedures.
Actively discourage extended payment plans. Make certain that
any such arrangement is approved in advance by you. Be certain
that your subordinates and the sales department understand that
NO authority to offer or accept extended payment plans without
If you accept a payment plan, make certain it is documented -
preferably in the form of an interest bearing Promissory Note with
a default acceleration clause, and accompanied by a personal guarantee
Treat customers payment proposals as invitations to negotiate
rather than deals cast in stone.
If a customer cannot pay you in full, request and expect them
to make a substantial "good faith" payment, and to make
a specific commitment to pay the remaining balance within a reasonable
Be prepared to hold orders sooner rather than later when accounts
go past due.
Talk to decision makers, not message takers.
If a customer is withholding a payment over a small dollar dispute,
insist that the undisputed portion be paid immediately.
Recognize that at some point, accounts cease to be customers
and become debtors. When an account becomes a debtor, it is more
to collect the past due balance than it is to worry about damaging
goodwill between your company and the account.
Many collection problems [and bad debts] result from poor or
inadequate initial credit investigations. Think of credit extension
a loan. A bank would not make a loan without a completed application.
A trade creditor should not extend credit without receiving a credit
application and then carefully evaluating the applicant's creditworthiness.
Consider seeking the help of a third party collection agency
if and when you find that you are no longer making progress in
on a past due balance. In debt collection, if you are not moving
forward, you are moving backward --- there is no neutral or middle